——The Complete Bankruptcy of the Algorithmic Stablecoin Myth

1. How Does Terra Operate?

Terra attempts to maintain the stablecoin UST = 1 USD through a set of "self-regulating" algorithms. The core logic is not based on real dollar reserves, but rather on the minting/destruction exchange relationship between UST and LUNA, using market arbitrage to stabilize it.

In normal circumstances, this mechanism relies on one premise:
👉 The market is always willing to take on the value expectations of LUNA.

2. Anchor: High Yields Are the Detonator, Not a Moat

The growth engine of the Terra ecosystem comes from the Anchor Protocol:

  • UST deposits yield nearly 20% annualized
  • The yields do not come from real lending demand, but from subsidies + money-printing style support

This makes the demand for UST appear strong, but in reality, it is extremely fragile—
once subsidies stop or confidence wavers, funds will instantly reverse and withdraw.

3. How Does the Death Spiral Occur?

In May 2022, UST experienced its first significant depegging:

  1. Large amounts of UST are sold → falls below 1 USD
  2. Arbitrageurs exchange UST for LUNA → LUNA supply surges
  3. LUNA price plummets → market cap insufficient to support UST
  4. Confidence collapses → selling accelerates → enters the death spiral

Within a few days:

  • UST completely loses its peg
  • LUNA drops from hundreds of dollars to near zero
  • Millions of investors suffer devastating losses

4. Why Is This a Systemic Collapse?

Terra's problem is not just "algorithmic failure," but structural flaws:

  • ❌ Stability depends on token market cap, not real assets
  • ❌ The yield model is unsustainable, yet packaged as "low risk"
  • ❌ Highly concentrated narrative; once confidence crumbles, it cannot self-rescue

Essentially, this was an experiment in supporting stability promises with the illusion of liquidity.

5. Chain Reaction: The True Starting Point of the Bear Market

The Terra collapse did not stop at itself:

  • Three Arrows Capital (3AC) heads toward bankruptcy due to heavy positions in LUNA/UST
  • Multiple lending platforms (Celsius, Voyager) face liquidity exhaustion
  • The crypto market enters a full deleveraging phase

👉 The 2022 crypto winter officially begins from here.

6. Core Lessons Left by Terra

  • Stablecoins are not stable just because the name has 'stable' in it
  • High yields that cannot explain their source are risks in themselves
  • The limits of DeFi are not in the code, but in human nature and confidence